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Arthur Laffer (Photo credit: Wikipedia)

Liberals claim that the Laffer Curve has been discredited, and that tax cuts don’t pay for themselves. OK, how about a $4.8 trillion supply-side tax cut that fully pays for itself before it even takes effect?

The stagnant U.S. economy is crushing the dreams of far too many Americans. Young adults are moving back in with their parents, delaying marriage, and delaying having children because they can’t get decent jobs. They will not get the lost years back.

After more than three and a half years of “economic recovery”, we have 3.3 million fewer jobs than we did in November 2007, while our working-age population has grown by 11.0 million. Median family income has declined by 7.2% since December 2007.

Something must be done, and it must be something big. Raising the minimum wage to $9.00/hour, which seems to be President Obama’s latest “big idea”, is an absurdly small response to an economic crisis of this magnitude.

First and foremost, we need “a return to normalcy” on the part of our flailing, failing Federal Reserve. We need a dollar whose value is stabilized against gold or some basket of commodities, and we need interest rates that are determined by the capital markets, not by bureaucrats sitting around a table in Washington, D.C.

However, a stable dollar, while necessary for prosperity, is not sufficient. If we are going to produce an economic recovery powerful enough to revive the life prospects of the current generation of young people, we also need massive supply-side tax cuts. Specifically, we need to eliminate our corporate income tax.

From 1981 to 1999, America’s corporate income tax rate (currently 39.1%, which includes state taxes) was lower than the GDP-weighted average of the OECD nations that are our primary economic competitors. The U.S. economy did fairly well during this period. Real GDP growth averaged 3.3%, and the nation reached full employment in April 2000.

However, while our corporate income tax rate has been essentially unchanged since 1988, our OECD competitors have been cutting theirs relentlessly.

The GDP-weighted-average OECD corporate income tax rate fell below our own in 2000 and has continued to decline. By 2012, it was 6.7 percentage points lower than ours (32.4% vs. 39.1%), and was still falling, as other nations move forward with additional corporate income tax rate cuts.

Hello, jobless recoveries. From 2000 to 2012, real economic growth averaged only 1.8%, and we moved 15 million jobs away from full employment.

Unfortunately, the GDP-weighted-average OECD corporate income tax rate comparison does not fully capture the extent of our competitive disadvantage in attracting capital investment, and therefore jobs. The numerical average OECD corporate income tax rate in 2012 was 25.4%, which is 13.7 percentage points below ours. And, Canada, the country that is most competitive with the U.S. for capital investment from American companies, is offering a corporate tax rate of 26.1%.

The answer is not to merely cut our corporate tax rate. If we were to cut it to 25%, as many have proposed, this would merely make us competitive among OECD nations for a year or two, until other nations cut theirs further. It would certainly not produce the massive surge of investment and economic growth that we need to get Americans back to work.

Right now, we are 15 million jobs short of full employment. The average job in the U.S. economy is sustained by about $200,000 of nonresidential assets. So, we would need to induce businesses to invest $3 trillion, over and above what they are planning to invest now, to create the additional jobs that we need. Obviously, only a drastic change in economic policy could produce such a dramatic shift in investor behavior. Federally funded universal preschool, another one of Obama’s “big ideas”, is not going to get the job done.

The complete elimination of our corporate income tax would produce the surge of investment and job creation that America needs. It would immediately make the U.S. the world’s capital of capital. Foreign multinational corporations would race to move their headquarters here. America would become a preferred location for manufacturing for export.

Repealing the corporate income tax would eliminate the huge costs of complying with this tax. For many companies, including all startups, compliance costs far exceed the corporate income taxes paid. The economics facing startup companies are vital, because companies less than five years old account for more than 100% of net job creation.

But wait! Tax cuts don’t pay for themselves, right? The Laffer Curve has been discredited, right?

Wrong. All supply-side tax cuts easily pay for themselves, and the Laffer Curve is alive and well. Present value analysis* makes both of these points clear.

From a financial point of view, a tax cut pays for itself if the present value of future federal revenues is the same or greater after the tax cut as it was before. The present value of future federal revenues is equal to the present value of future GDP times the “tax take”, which is the percentage of GDP captured by federal taxes.